Zynga’s IPO is starting to raise eyebrows

The San Francisco-based developer of popular games like CityVille and FarmVille might see its valuation — once estimated as high as $20 billion — revisited. With each new updated filing, its proposed IPO is starting to look more problematic to some investors; however, unlike Groupon, Zynga is profitable.

There are still issues for Zynga, though, that are relevant to the marketplace, including its heavy reliance on Facebook as well as a drop in net income. In addition, some data show that daily usage of its games has slipped, and there are concerns about the control founder and Chief Executive Mark Pincus has over the business.

“Here is a company that has a 99% dependence on Facebook, and at first they wouldn’t disclose the nature of the contract,” said Sam Hamadeh, chief executive of PrivCo.com, a New York-based firm that analyzes privately held companies and also has been critical of Groupon. “There were all sorts of things in the Facebook contract that when I read it and when other analysts read it were jaw-dropping.”

Facebook takes a whopping 30% of any revenue Zynga generates by the selling virtual goods users buy when playing its games.

Since its initial S-1 filing on July 1, Zynga has updated its IPO prospectus four times, and with each revised version, its financial statements seem less appealing. One of its updates, which included its second-quarter earnings, showed a big jump in costs of revenue, which almost doubled over six months, in part due to rising hosting costs and an increase in marketing spending.

Also in the second quarter, net income fell to $1.4 million, down from $13.9 million in the year-ago period, even though revenue continued to soar to $279 million, up from $130 million in the second quarter of 2010.

Zynga is making moves to wean itself off Facebook as a platform, where most of its customers play its games, and much was written about those plans last week. Zynga hosted the press Tuesday at its new headquarters to talk about its plans to build its own platform, providing customers an additional social playground, code-named Project Z.

A spokeswoman declined to comment about speculation about the company’s IPO. Pincus, who was a scheduled speaker at the Web 2.0 Summit Monday, canceled his appearance, citing the IPO quiet period.

Investors thinking about buying Zynga’s shares might also want to note that Pincus has cashed out a chunk of stock. In March, Zynga said it bought back $109.5 million worth of stock from the chief executive. In addition, it paid $70,000 in 2010 for security services for Pincus, and reimbursed him for the company use of an airplane he owns.